Skip to main content

Corporate scandals and the reliability of ESG assessments: evidence from an international sample

Abstract

This paper studies the reliability of environmental, social, and governance (ESG) assessments in the case of corporate scandals. Reliable disclosures on ESG assessments may reduce information asymmetries when it comes to due diligence, for instance. We use the press release of corporate scandals, which are seen as being unexpected events, and analyze ESG assessments before, during, and after the event year. We find a significant decline in retrospective controversy indicators during the period in which the scandals are released. Subsequent to the scandals, we document a rebound of these indicators. The assessments of forward-looking indicators indicate slightly significant increases during the scandal period. Moreover, our findings show that aggregated ESG assessments consisting of both retrospective and forward-looking indicators are useless when it comes to predicting corporate scandals. Therefore, the managerial implication of this paper recommends educating managers and investors upon how to obtain a comprehensive vision of the corporate social responsibility of a firm based on single ESG assessment indicators.

This is a preview of subscription content, access via your institution.

Fig. 1
Fig. 2

Notes

  1. This argument is valid for both direct and passive investments.

  2. These 18 categories are clustered into four pillars. The first pillar, the corporate governance dimension, consists of five categories: Board functions, board structure, compensation policy, vision and strategy, and shareholder rights. The second pillar, the economic dimension, consists of three categories: Performance, shareholder loyalty, and client loyalty. The third pillar, the environment dimension, consists of three categories: Emission reduction, product innovation, and resource reduction. Finally, the fourth pillar, the social dimension consists of seven categories: Product responsibility, community, human rights, diversity and opportunity, employment quality, health & safety, and training & development.

  3. The average autocorrelation in our sample over all ESG ratings and the entire time period from 2004 until 2015 is 0.81.

  4. Since we did not receive the entire set of control variables for three firms, the sample size in this analysis amounts to 64 scandals.

References

  • Alles MG, Kogan A, Vasarhelyi MA (2004) Restoring auditor credibility: tertiary monitoring and logging of continuous assurance systems. Int J Account Inf Syst 5:183–202

    Google Scholar 

  • Attig N, Ghoul SE, Guedhami O, Suh J (2013) Corporate social responsibility and credit ratings. J Bus Ethics 117:679–694

    Google Scholar 

  • Ballestero E, Bravo M, Pérez-Gladish B, Arenas-Parra M, Plà-Santamaria D (2012) Socially responsible investment: a multicriteria approach to portfolio selection combining ethical and financial objectives. Eur J Oper Res 216:487–494

    Google Scholar 

  • Baucus MS, Baucus DA (1997) Paying the piper: an empirical examination of longer-term financial consequences of illegal corporate behavior. Acad Manage J 40:129–151

    Google Scholar 

  • Beal DJ, Goyen M (1998) ‘Putting your money where you mouth is’ A profile of ethical investors. Financ Serv Rev 7:129–143

    Google Scholar 

  • Beal DJ, Goyen M, Phillips P (2005) Why do we invest ethically? J Invest 14:66–78

    Google Scholar 

  • Belal AR, Cooper S (2011) The absence of corporate social responsibility reporting in Bangladesh. Critic Perspect Account 22:654–667

    Google Scholar 

  • Bernile G, Jarrell GA (2009) The impact of the options backdating scandal on shareholders. J Account Econ 47:2–26

    Google Scholar 

  • Bhandari LC (1988) Debt/equity ratios and expected common stock returns: empirical evidence. J Finance 43:507–528

    Google Scholar 

  • Boos DD (2013) Introduction to the bootstrap world. Stat Sci 18:168–174

    Google Scholar 

  • Brown HS, De Jong M, Levy DL (2009) Building institutions based on information disclosure: lessons from GRIs sustainability reporting. J Clean Prod 17:571–580

    Google Scholar 

  • Chapman-Davies A, Parwada JT, Tan KM (2014) The impact of scandals on mutual fund performance, money flows and fees. SSRN working paper

  • Chatterji AK, Levine DI, Toffel MW (2009) How well do social ratings actually measure corporate social responsibility? J Econ Manag Strategy 18:125–169

    Google Scholar 

  • Chen Y, Ganesan S, Liu Y (2009) Does a firm’s product-recall strategy affect its financial value? An examination of strategic alternatives during product-harm crises. J Mark 73:214–226

    Google Scholar 

  • Cheung AWK (2011) Do stock investors value corporate sustainability? Evidence from an event study. J Bus Ethics 99:145–165

    Google Scholar 

  • Cho HJ, Pucik V (2005) Relationship between innovativeness, quality, growth, profitability, and market value. Strateg Manage J 26:555–575

    Google Scholar 

  • Cormier D, Magnan M, van Velthoven B (2005) Environmental disclosure quality in large German companies: economic incentives, public pressures or institutional conditions? Eur Account Rev 14:3–39

    Google Scholar 

  • Curran MM, Moran D (2007) Impact of the FTSE4Good index on firm price: an event study. J Environ Manag 82:529–537

    Google Scholar 

  • Daniel K, Titman S (1997) Evidence on the characteristics of cross sectional variation in stock returns. J Finance 52:1–33

    Google Scholar 

  • Davidson W, Worrell D (1992) The effect of product recall announcements on shareholder wealth. Strateg Manage J 13:467–473

    Google Scholar 

  • Delmas M, Blass VD (2010) Measuring corporate environmental performance: the trade-offs of sustainability ratings. Bus Strategy Environ 19:245–260

    Google Scholar 

  • Devinney TM (2009) Is the socially responsible corporation a myth? The good, bad and ugly of corporate social responsibility. Acad Manage Perspect 23:44–56

    Google Scholar 

  • Diebecker J, Sommer F (2017) The impact of corporate sustainability performance on information asymmetry: the role of institutional differences. Rev Manag Sci 11:471–517

    Google Scholar 

  • Dorfleitner G, Utz S (2012) Safety first portfolio choice based on financial and sustainability returns. Eur J Oper Res 221:155–164

    Google Scholar 

  • Dorfleitner G, Utz S, Wimmer M (2014) Patience pays off—financial long-term benefits of sustainable management decisions. SSRN Working Paper

  • Dubbink W, Graafland J, Van Liedekerke L (2008) CSR, transparency and the role of intermediate organisations. J Bus Ethics 82:391–406

    Google Scholar 

  • Eccles RG, Serafeim G, Krzus MP (2011) Market interest in nonfinancial information. J Appl Corp Finance 23:113–127

    Google Scholar 

  • Edmans A (2011) Does the stock market fully value intangibles? Employee satisfaction and equity prices. J Financ Econ 101:621–640

    Google Scholar 

  • EFAMA (2017) Asset management in Europe. http://www.efama.org/statistics/sitepages/asset%20management%20report.aspx

  • Escrig-Olmedo E, Munoz-Torres MJ, Fernández-Izquierdo MA, Rivera-Lirio JM (2014) Lights and shadows on sustainability rating scoring. Rev Manag Sci 8:559–574

    Google Scholar 

  • EUROSIF (2014) European SRI study. http://www.eurosif.org/wp-content/uploads/2014/09/Eurosif-SRI-Study-20142.pdf

  • EUROSIF (2016) European SRI study 2016. https://www.eurosif.org/sri-study-2016/

  • Fama EF, French KR (1988) Dividend yields and expected stock returns. J Financ Econ 22:3–25

    Google Scholar 

  • Fama EF, French KR (1992) The cross-section of expected stock returns. J Finance 47:427–465

    Google Scholar 

  • Fatemi A, Glaum M, Kaiser S (2017) ESG performance and firm value: the moderating role of disclosure. Glob Finance J. https://doi.org/10.1016/j.gfj.2017.03.001

    Google Scholar 

  • Fernández-Gago R, Cabeza-García L, Nieto M (2016) Corporate social responsibility, board of directors, and firm performance: an analysis of their relationships. Rev Manag Sci 10:85–104

    Google Scholar 

  • Fernandez-Izquierdo MA, Arago-Manzana VA, Matallín-Sáez JC, Nieto-Soria L (2009) Do investors in Spain react to news on sustainability and corporate social responsibility. Int J Sustain Econ 1:227–244

    Google Scholar 

  • Ferstl R, Utz S, Wimmer M (2012) The effect of the Japan 2011 disaster on nuclear and alternative energy stocks worldwide: an event study. BuR Bus Res 5:25–41

    Google Scholar 

  • Fisman R, Svensson J (2007) Are corruption and taxation really harmful to growth? Firm level evidence. J Dev Econ 83:63–75

    Google Scholar 

  • Fortanier F, Kolk A, Pinske J (2011) Harmonization in CSR reporting. Manage Int Rev 51:665–696

    Google Scholar 

  • Freedman S, Kearney M, Lederman M (2012) Product recalls, imperfect information, and spillover effects: lessons from the consumer response to the 2007 toy recalls. Rev Econ Stat 94:499–516

    Google Scholar 

  • Frost GR, Seamer M (2002) Adoption of environmental reporting and management practices: an analysis of New South Wales public sector entities. Financ Account Manage 18:103–127

    Google Scholar 

  • Gallo PJ, Christensen LJ (2011) Firm size matters: an empirical investigation of organizational size and ownership on sustainability-related behaviors. Bus Soc 50:315–349

    Google Scholar 

  • Gamerschlag R, Möller K, Verbeeten F (2011) Determinants of voluntary CSR disclosure: empirical evidence from Germany. Rev Manag Sci 5:233–262

    Google Scholar 

  • Getzner M, Grabner-Kräuter S (2004) Consumer preferences and marketing strategies for ‘green shares’ specifics of the Austrian market. Int J Bank Mark 22:260–279

    Google Scholar 

  • Giannarakis G, Konteos G, Sariannidis N (2014) Financial, governance and environmental determinants of corporate social responsible disclosure. Manage Decis 52:1928–1951

    Google Scholar 

  • Global Reporting Initiative (2017) Reporting principles and standard disclosures. Technical report, Global Reporting Initiative. https://www.globalreporting.org/resourcelibrary/GRIG4-Part1-Reporting-Principles-and-Standard-Disclosures.pdf

  • Gokhale J, Brooks RM, Tremblay VJ (2014) The effect on stockholder wealth of product recalls and government action: the case of Toyota’s accelerator pedal recall. Q Rev Econ Finance 54:521–528

    Google Scholar 

  • Graves SB, Rehbein K, Waddock S (2001) Fad and fashion in shareholder activism: the landscape of shareholder resolutions, 1988–1998. Bus Soc Rev 106:293–315

    Google Scholar 

  • Gürtürk A, Hahn R (2016) An empirical assessment of assurance statements in sustainability reports: smoke screens or enlightening information? J Clean Prod 136:30–41

    Google Scholar 

  • Hafenstein A, Bassen A (2016) Influences for using sustainability information in the investment decision-making of non-professional investors. J Sustain Finance Invest 6:186–210

    Google Scholar 

  • Hahn R, Kühnen M (2013) Determinants of sustainability reporting: a review of results, trends, theory, and opportunities in an expanding field of research. J Clean Prod 59:5–21

    Google Scholar 

  • Haigh M, Hazelton J (2004) Financial markets: a tool for social responsibility? J Bus Ethics 52:59–71

    Google Scholar 

  • Hallerbach W, Ning H, Soppe A, Spronk J (2004) A framework for managing a portfolio of socially responsible investments. Eur J Oper Res 153:517–529

    Google Scholar 

  • Heflin F, Wallace D (2015) The BP oil spill: shareholder wealth effects and environmental disclosures. J Bus Finance Account 44:337–374 (SSRN Working Paper)

    Google Scholar 

  • Hess D (2007) Social reporting and new governance regulation: the prospects of achieving corporate accountability through transparency. Bus Ethics Q 17:453–476

    Google Scholar 

  • Hess D (2008) The three pillars of corporate social reporting as new governance regulation: disclosure, dialogue, and development. Bus Ethics Q 18:447–482

    Google Scholar 

  • Hess D, Dunfee TW (2007) The Kasky-Nike threat to corporate social reporting: implementing a standard of optimal truthful disclosure as a solution. Bus Ethics Q 17:5–32

    Google Scholar 

  • Hillman AJ, Keim GD (2001) Shareholder value, stakeholder management, and social issues: what’s the bottom line? Strateg Manage J 22:125–139

    Google Scholar 

  • Hong H, Kubik JD, Scheinkman JA (2012) Financial constraints on corporate goodness. nBER working paper

  • Houge T, Wellman J (2005) Fallout from mutual fund trading scandal. J Bus Ethics 62:129–139

    Google Scholar 

  • Ioannou I, Serafeim G (2015) The impact of corporate social responsibility on investment recommendations: analysts’ perceptions and shifting institutional logics. Strateg Manage J 36:1053–1081

    Google Scholar 

  • Ioannou I, Serafeim G (2017) The consequences of mandatory corporate sustainability reporting. SSRN working paper

  • Jain S, Jain P, Rezaee Z (2010) Stock market reactions to regulatory investigations: evidence from options backdating. Res Account Regul 22:52–57

    Google Scholar 

  • Janney JJ, Gove S (2011) Reputation and corporate social responsibility aberrations, trends, and hypocrisy: reactions to firm choices in the stock option backdating scandal. J Manage Stud 48:1562–1585

    Google Scholar 

  • Jansson M, Biel A (2011) Motives to engage in sustainable investment: a comparison between institutional and private investors. Sustain Dev 19:135–142

    Google Scholar 

  • Jansson M, Biel A (2014) Investment institutions’ belief about and attitudes towards socially responsible investment (SRI): a comparison between SRI and non-SRI management. Sustain Dev 22:33–41

    Google Scholar 

  • Jarrel G, Peltzman S (1985) The impact of product recalls on the wealth of sellers. J Polit Econ 93:512–536

    Google Scholar 

  • Jory SR, Ngo TN, Wang D, Saha A (2015) The market response to corporate scandals involving CEOs. Appl Econ 47:1723–1738

    Google Scholar 

  • Kappel V, Schmidt P, Ziegler A (2009) Human rights abuse and corporate stock performance—an event study analysis. SSRN working paper

  • Kim Y, Li H, Li S (2014) Corporate social responsibility and stock price crash risk. J Bank Finance 43:1–13

    Google Scholar 

  • Klonoski RJ (1986) The moral responsibilities of stockholders. J Bus Ethics 5:385–390

    Google Scholar 

  • Knecht F, Reich S (2014) Wertschöpfungsketten: ESG als kritischer Erfolgsfaktor für das Management des gesamten Lebenszyklus. In: Schulz T, Bergius S (eds) Corporate social responsibility. Springer, Berlin (chap CSR und Finance)

    Google Scholar 

  • Kolk A (2008) Sustainability, accountability and corporate governance: exploring multinationals’ reporting practices. Bus Strategy Environ 18:1–15

    Google Scholar 

  • Kumar A, Smith C, Badis L, Wang N, Ambrosy P, Tavares R (2016) ESG factors and risk-adjusted performance: a new quantitative model. J Sustain Finance Invest 6:292–300

    Google Scholar 

  • Laufer WS (2003) Social accountability and corporate greenwashing. J Bus Ethics 43:253–261

    Google Scholar 

  • Levy DL, Brown HS, De Jong M (2010) The contested politics of corporate governance: the case of the global reporting initiative. Bus Soc 49:88–115

    Google Scholar 

  • Lewis A, Mackenzie C (2000) Support for investor activism among UK ethical investors. J Bus Ethics 24:215–222

    Google Scholar 

  • Liua S, Wu D (2016) Competing by conducting good deeds: the peer effect of corporate social responsibility. Finance Res Lett 16:47–54

    Google Scholar 

  • Long DM, Rao S (1995) The wealth effects of unethical business behavior. J Econ Finance 19:65–73

    Google Scholar 

  • MacKinlay CA (1997) Event studies in economics and finance. J Econ Lit 35:13–39

    Google Scholar 

  • MacLean R (2012) ESG comes of age. Environ Qual Manage 22:99–108

    Google Scholar 

  • Magno F (2012) Managing product recalls: the effect of time, responsible vs. opportunistic recall management and blame on consumers’ attitudes. Procedia Soc Behav Sci 58:1309–1315

    Google Scholar 

  • Mamingi N, Dasgupta S, Laplante B, Hong JH (2006) Firms’ environmental performance: does news matter?. World Bank Policy research working paper no. 3888

  • Marcus AA, Goodman R (1989) Corporate adjustments to catastrophe: a study of investor reaction to Bhopal. Ind Crisis Q 3:213–234

    Google Scholar 

  • McWilliams A, Siegel D, Teoh SH (1999) Issues in the use of the event study methodology: a critical analysis of corporate social responsibility studies. Organ Res Methods 2:340–365

    Google Scholar 

  • Mitchell ML, Netter JM (1994) The role of financial economics in securities fraud cases: applications at the securities and exchange commission. Bus Lawyer 49:545–590

    Google Scholar 

  • Mock TJ, Rao SS, Srivastava RP (2013) The development of worldwide sustainability reporting assurance. Aust Account Rev 67:280–294

    Google Scholar 

  • Moneva JM, Ortas E (2008) Are stock markets influenced by sustainability matter? Evidence from European companies. Int J Sustain Econ 1:1–16

    Google Scholar 

  • MSCI (2016) Volkswagen scandal underlines need for ESG analysis. https://www.msci.com/volkswagen-scandal

  • Nelson KK, Price RA, Rountree BR (2008) The market reaction to Athur Anderson’s role in the Enron scandal: loss of reputation or confounding effects? J Account Econ 46:279–293

    Google Scholar 

  • Nikolaeva R, Bicho M (2011) The role of institutional and reputational factors in the voluntary adoption of corporate social responsibility standards. J Acad Mark Sci 39:136–157

    Google Scholar 

  • Nilsson J (2009) Segmenting socially responsible mutual fund investors: the influence of financial return and social responsibility. Int J Bank 27:5–31

    Google Scholar 

  • O’Dwyer B, Owen DL, Unerman J (2011) Seeking legitimacy for new assurance forms: the case of assurance on sustainability reporting. Account Organ Soc 36:31–52

    Google Scholar 

  • Oll J, Hahn R, Reimsbach D, Kotzian P (2016) Tackling complexity in business and society research: the methodological and thematic potential of factorial surveys. Bus Soc. https://doi.org/10.1177/0007650316645337

    Google Scholar 

  • Orlitzky M (2013) Corporate social responsibility, noise, and stock market volatility. Acad Manage Perspect 27:238–254

    Google Scholar 

  • Paetzold F, Busch T (2014) Unleashing the powerful few: sustainable investing behaviour of wealthy private investors. Organ Environ 27:347–367

    Google Scholar 

  • Pasewark WR, Riley ME (2010) It’s a matter of principle: the role of personal values in investment decisions. J Bus Ethics 93:237–253

    Google Scholar 

  • Pfarrer MD, Decelles KA, Smith KG, Taylor MS (2008) After the fall: reintegrating the corrupt organization. Acad Manage Rev 33:730–749

    Google Scholar 

  • Pillmore EM (2003) How we’re fixing up Tyco? Harv Bus Rev 81:96–103

    Google Scholar 

  • Pontiff J, Schall LD (1998) Book-to-market ratios as predictors of market returns. J Financ Econ 49:141–160

    Google Scholar 

  • Potter M, Schwartz CG (2012) The mutual fund scandal and investor response. J Index Invest 1:29–38

    Google Scholar 

  • Prado-Lorenzo J, Rodríguez-Domínguez L, Gallego-Álvarez I, García-Sánchez I (2009) Factors influencing the disclosure of greenhouse gas emissions in companies world-wide. Manage Decis 47:1133–1157

    Google Scholar 

  • Rehbein K, Waddock S, Graves SB (2004) Understanding shareholder activism: which corporations are targeted? Bus Soc 43:239–268

    Google Scholar 

  • Reuters T (2013) Thomson Reuters corporate responsibility ratings (TRCRR) rating and ranking rules and methodologies. http://financial.thomsonreuters.com/content/dam/openweb/documents/pdf/tr-com-financial/methodology/corporate-responsibility-ratings.pdf

  • Reverte C (2016) Corporate social responsibility disclosure and market valuation: evidence from Spanish listed firms. Rev Manag Sci 10:411–435

    Google Scholar 

  • Rivoli P (1995) Ethical aspects of investor behavior. J Bus Ethics 14:267–277

    Google Scholar 

  • Rusinova V, Wernicke G (2016) Access to finance and corporate social responsibility: evidence from a natural experiment. In: Humphreys J (ed) Proceedings of the seventy-sixth annual meeting of the academy of management: making organizations meaningful. Academy of Management, Briar Cliff Manor, NY, pp 1700–1705

    Google Scholar 

  • Schwert GW (1983) Size and stock returns, and other empirical regularities. J Financ Econ 12:3–12

    Google Scholar 

  • Shiller RJ (2005) Irrational exuberance, 2nd edn. Princeton University Press, Princeton

    Google Scholar 

  • Shleifer A (2000) Inefficient markets: an introduction to behavioral finance. Oxford University Press, Oxford

    Google Scholar 

  • Silverman H (2002) Henry Silverman on fraud and recovery. https://www.bloomberg.com/news/articles/2002-07-30/henry-silverman-on-fraud-and-recovery. Accessed 4 June 2017. (Bloomberg Businessweek)

  • Sims R (2009) Toward a better understanding of organizational efforts to rebuild reputation following an ethical scandal. J Bus Ethics 90:453–472

    Google Scholar 

  • Souiden N, Pons F (2009) Product recall crisis management: the impact on manufacturer’s image, consumer loyalty and purchase intention. J Prod Brand Manage 18:106–114

    Google Scholar 

  • S&P Dow Jones Indices (2015) Volkswagen AG to be removed from the Dow Jones sustainability indices. Technical report, S&P Dow Jones Indices, http://www.sustainability-indices.com/images/150929-statement-vw-exclusion_vdef.pdf

  • Sparkes R (2002) Socially responsible investment: a global revolution. John Wiley, New York

    Google Scholar 

  • Stanny E, Ely K (2008) Corporate environmental disclosures about the effects of climate change. Corp Soc Responsib Environ Manage 15:338–348

    Google Scholar 

  • Stellner C, Klein C, Zwergel B (2015) Corporate social responsibility and Eurozone corporate bonds: the moderating role of country sustainability. J Bank Finance 59:538–549

    Google Scholar 

  • Strachan JL, Smith DB, Beedles W (1983) The price reaction to (alleged) corporate crime. Financ Rev 18:121–132

    Google Scholar 

  • Thaler RH (1993) Advances in behavioral finance. Russell Sage Foundation, New York

    Google Scholar 

  • Thaler RH (2005) Advances in behavioral finance. II. Princeton University Press, Princeton

    Google Scholar 

  • UmweltDialog (2015) Dow Jones sustainability indizes 2015: Ergebnisse bekanntgegeben. http://www.umweltdialog.de/de/csr-management/csr-nachrichten/2015/Ergebnisse-fuer-Dow-Jones-Sustainability-Indizes-2015-bekanntgegeben.php

  • USSIF (2016) US sustainable, responsible and impact investing trends 2016. http://www.ussif.org/files/SIF_Trends_16_Executive_Summary(1).pdf

  • Utz S (2017) Over-investment or risk mitigation? Corporate social responsibility in Asia-Pacific, Europe, Japan, and the United States. Rev Financ Econ. https://doi.org/10.1016/j.rfe.2017.10.001

    Google Scholar 

  • Utz S, Wimmer M, Steuer RE (2015) Tri-criterion modeling for constructing more-sustainable mutual funds. Eur J Oper Res 246:331–338

    Google Scholar 

  • Wang X, Cao F, Ye K (2016) Mandatory corporate social responsibility (CSR) reporting and financial reporting quality: evidence from a quasi-natural experiment. J Bus Ethics. https://doi.org/10.1007/s10551-016-3296-2

    Google Scholar 

  • Windolph SE (2011) Assessing corporate sustainability through ratings: challenges and their causes. J Environ Sustain 1:36–57

    Google Scholar 

  • Zorio A, Garcí-Benau MA, Sierra L (2013) Sustainability development and the quality of assurance reports: empirical evidence. Bus Strategy Environ 22:484–500

    Google Scholar 

Download references

Author information

Authors and Affiliations

Authors

Corresponding author

Correspondence to Sebastian Utz.

Appendix

Appendix

See Table 8.

Table 8 List of scandals

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Utz, S. Corporate scandals and the reliability of ESG assessments: evidence from an international sample. Rev Manag Sci 13, 483–511 (2019). https://doi.org/10.1007/s11846-017-0256-x

Download citation

  • Received:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s11846-017-0256-x

Keywords

  • Corporate social responsibility
  • ESG rating
  • CSR scandals
  • ESG reliability

JEL classification

  • G39
  • G14